Investors pay for performance - here is evidence


Stephen Mandel, Lone Pine Capital

Globally, the asset management business is seeing shrinking margins as low-cost passive investing gains momentum at the expense of higher cost active strategies. The hedge fund world is an exception though, on the back of their superior track record. And within the hedge fund world, Stephen Mandel stands out with a unique fee structure which he says is a win-win for his clients and his managers, though detractors say his clients end up paying more. Clients continue to give him huge sums of money to manage despite his fee model - Lone Pine Capital manages over $ 23 billion in assets. Why? Because of his staggering track record of delivering a 20% alpha over US S&P 500 over the last 11 years. Who says clients don't pay for performance?


Steve Mandel, a 'Tiger cub', is one of the brightest stars to exit Julian Robertson's famed Tiger Management and branch off on his own. As a young man, Mandel graduated from Dartmouth College in 1978 and from Harvard Business School in 1982.

Steve Mandel was a Senior Consultant at Mars and Company from 1982 till 1984. He moved on to Goldman Sachs, where he was Mass-Market Retailing Analyst and Equity Analyst in the Research Division, between 1984 and 1990. Mandel worked for Tiger Management as a Senior Managing Director and Consumer Analyst from 1990 until 1997. At this point, in 1997, he started Lone Pine Capital LLC.

Investment Philosophy

Essentially Mandel is a long-short strategy practitioner. He uses fundamental analyses and picks stocks on a bottom up basis for investment. It is difficult to label Mandel's style of investing. Indeed he is neither a value investor nor a growth fundamentalist. He has evolved his own method, which consists of discovering soundly run businesses steered by capable managements. He takes to care to buy such stocks at profitable valuations and prices.

Investment Strategy

While choosing prospective stocks for investment, he concentrates on the underlying business prospects of the target company. He performs a thorough analysis of the business to understand the operations, corporate practises and importantly the trajectory of future business growth. Further, he is gifted with the ability to glide in and out of stock positions easily, making quick decisions based on his balanced judgement.

The Stephen Mandel strategy involves favouring either stocks that compound value through organic earnings growth or companies that are "undergoing favourable management and strategic changes not yet realized in their valuations." Mandel says that while this strategy is not currently in favour, the approach "has characterized our investing since our founding and we believe strongly in its long-term validity."(Valuewalk)

In practise Mandel does not hold stocks for long. For example in 2006 he had 3 million Apple shares valued at $85 per share. He sold 1.5 million of these shares between April and June 2007 at $120 per share. Upon the price reaching $150 per share, he sold another quarter million shares. As soon as the price reached the $200 benchmark, Mandel reduced his shares substantially to just 600,000 shares. Then, Mandel unexpectedly added about 2.3 million shares in March 2008 when Apple shares went down to $140.

Lone Pine Capital

This firm started by Mandel in 1997 has its headquarters in Greenwich Connecticut. It has offices in Hong Kong, New York and London. It is named after a mythical pine tree that survived a lightning strike in 1887. An apt simile for a hedge fund!

In 2012, Mandel became one of the highest paid hedge fund managers in the world, earning a huge $350million in that year. Steve Mandel and Lone Pine have returned 23% over the last several years. However his market beta is high and he failed to provide downside cover during the 2008 crisis.

Lone Pine Capital LLC is a privately owned hedge fund sponsor which invests in the public equity markets across the globe. From its initial, humble launch with $8 million, the fund has today established itself as a "mega fund" with $23 billion in assets under management and an estimated personal wealth of $1.5 billion for Stephen Mandel. The fund has consistently beaten the S&P 500 index by over twenty percentage points since its inception. Lone Pine Capital is a classic long/short equity hedge fund employing fundamental analysis together with a bottom up stock picking approach to formulate its portfolio. However, Mr Mandel's acumen and singular approach towards fundamental analysis - Seth Klarman once described him as a "fantastic analyst" - that separates Lone Pine Capital LLC from the generic pack. (Valuewalk - Hedge Fund Letters)

Unique fee structure

In 2004, Mandel introduced an innovative fee structure for managers. This aims to reduce the propensity of managers to liquidate stocks during times of poor performance. The 'Mandel fee structure' as it is termed, allows the hedge fund manager to earn an incentive fee even when performance is below the high water mark. When making new highs, the fund earns a 20% incentive fee. When recovering from a drawdown, but below the previous high-water mark, the fund earns a reduced 10% incentive fee, effectively earning fees multiple times for earning the same profits. The fund continues to earn the reduced 10% fee until it has earned back 150% of the drawdown amount. At this point the usual 20% rate kicks in. This reduces the volatility of fee revenue for managers, helping them take a proper view of market developments. Investors can benefit from the longevity of their fund once performance comes back on track.

Current Focus

Presently Mandel is focussing on companies with a strong presence on the internet. The fund's short position would consist of those companies whose business models are being crushed by the viral growth of new internet based technology companies.

In a letter addressed to the Lone Pine long-only Cascade Fund, Mandel writes: The internet remains the single most important and disruptive economic phenomenon in the world. It is transforming almost every sector of the economy. A few leading internet companies dominate the scarce real estate on the mobile web, a place where customers are flocking globally. These companies still have significant runway for growth and are not trading for overly demanding valuations. Increased mobile web use can also improve the economics of existing platforms: e.g., enterprise software companies such as Adobe and Microsoft as they move to accretive subscription models. It also untethers the videogame industry from the boom/bust nature of the traditional console cycle. Internet-driven investments remain the largest portion of our long portfolio. The impact of the internet is resulting in the permanent and on-going dismantling of longstanding economic models in advertising, media, retailing, technology and travel, among others.

As of the end of 2015, the Cascade fund's ten largest long stock positions included: Microsoft, Amazon, Tencent Holding, Facebook, Visa, Dollar Tree Stores, Williams Companies, Fleetcor Technologies,, and Charter Communications. ( Julia La Roche Jan 21, 2016)

Steve Mandel, an investment manager with a difference, remains one of the most successful hedge fund managers to date.


Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.

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